Why CVS Stopped Selling Cigarettes

CVS's decision to stop selling tobacco in its stores may be a strategic move designed to help the company's expanding line of in-store healthcare clinics.

Feb 11, 2014 at 8:50AM

CVS's (NYSE:CVS) decision to stop selling cigarettes in the United States as of Oct. 1 may be a move designed to help the company grow its in-store clinics.

With the U.S. government projecting that health care spending will rise to 20% of GDP, as reported by Bloomberg, CVS, Wal-Mart (NYSE:WMT), Walgreen (NASDAQ:WBA), Rite-Aid (NYSE:RAD), and other smaller players are rapidly opening health clinics in their stores. These clinics, which offer basic health services including flu shots and other medical procedures that usually require visiting a doctor, represent a growing opportunity for the chain.

"Health care is becoming more decentralized, and consumers are getting more choices about where to get care, whether that's a retail clinic or a traditional hospital," said Vaughn Kauffman, a principal in PriceWaterhouseCooper's Health Industries practice, in The Washington Post. "As we're out there talking to companies that are in retail, they see big opportunity here and are looking for ways to give consumers more convenient options."

More clinics to come

Health care spending is on the rise partially due to the improving economy and partially due to the people who are gaining health insurance through the Affordable Care Act. And though CVS sells other unhealthy products, tobacco may be the most harmful and least consistent with presenting a healthy image. According to the Centers for Disease Control, "smoking is the leading cause of preventable death and illness in the United States and causes an estimated 443,000 deaths a year in the nation."

Offering tobacco products next to what is essentially a doctor's office is sort of like having your Weight Watchers meeting at a Pizza Hut. CVS still offers lots of ways for customers to harm themselves (sugar and, in some markets, alcohol being the obvious ones), but removing smoking might allow for expansion of the chain's 750 Minute Clinics (as it calls its walk-in health centers).

Currently, CVS has a number of contracts with hospitals and health insurers to provide patient care -- in many cases during evening and weekend hours when traditional doctors' offices are closed. "CVS could now strike deals with more traditional health-care providers that might involve a financial bonus if the pharmacy helps reduce smoking rates among patients," according to The Washington Post article cited above.

The chain reported in its 2012 annual report that it already has deals with 250 commercial and government health plans. (The company does not break out financial results for the clinics in its quarterly or annual reports.)

"CVS Caremark is continually looking for ways to promote health and reduce the burden of disease," said CVS Chief Medical Officer Troyen A. Brennan, M.D. "Stopping the sale of cigarettes and tobacco will make a significant difference in reducing the chronic illnesses associated with tobacco use."

Candy, alcohol appear safe

When CVS announced it would drop cigarettes at its 7,600 locations in the United States earlier this month, the next logical question was whether the chain would similarly remove other unhealthy items from its shelves. It seems, however, that the company's concerns for the nation's health only extend so far.

"The decision to stop selling tobacco products underscores our role in the evolving health care system. Smoking is the leading cause of premature illness and death in the United States. Unlike those other products, which are OK in moderation, no amount of tobacco use is safe," said CVS spokesman Danielle Marcus in an email interview with the Fool.

Health care is a bigger business than smoking

While CVS may very well be ending the sale of cigarettes in its stores for purely benevolent reasons (and politicians may be saying what you want to hear because they actually believe it), expanded clinics are simply a bigger business than cigarettes.

Health insurance provider Aetna examined the rising cost of health care and found "total health care spending in the United States is expected to reach $4.8 trillion in 2021, up from $2.6 trillion in 2010 and $75 billion in 1970." It's a big pie that's growing bigger, and CVS is eagerly sticking its fingers in.

Dropping cigarette sales, CVS said in a press release, would cost the company $2 billion in 2014, but while health care spending is rising, health officials expect cigarette smoking to continue to fall -- perhaps even to zero. Acting U.S. Surgeon General Boris Lushniak last month released a 980-page report on smoking that pushed for stepped-up tobacco-control measures.

"I can't accept that we're just allowing these numbers to trickle down," he said in a recent interview with the AP as reported by the Denver Post. "We believe we have the public health tools to get us to the zero level."

The war is over

Cigarette smoking is actually bad for you and efforts to make the public aware of those dangers have largely worked. We've banished smokers from the workplace, restaurants, and in many places, bars. In general, efforts to make smokers and smoking seem awful have been successful.

Getting out of the tobacco business to improve its image as a health care provider and, perhaps grow its clinics, is simply good business for CVS.

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